While it may have seemed like the better option at the time, homeowners who secured cheaper, short-term mortgage rates when they bought their homes could see their monthly payments jump and rates double.
According to a report from Bloomberg, there are 1.7 million homes that have been purchased using adjustable-rate mortgages, or ARMs, since 2019.
While ARMS tend to offer cheaper rates, they only run for three to 10 years, meaning that after the time frame runs up, the borrower may be forced to pay market rates for a new loan, compared to the fixed rate that homebuyers typically get for a 30-year mortgage.
With current mortgage rates sitting at or above 7%, depending on the length of the loan, many homeowners who see their term mature this year could be faced with higher monthly payments.
The report from Bloomberg notes that the average size of five-year ARMs borrowed in 2019, at about $791,100 with a 3.3% rate, means that a homeowner would pay about $3,465 a month.
Now, Bankrate reports that ARM rates for five years are around 6.5%, almost double what their original rate was.
Under these new rates, homeowners could see their monthly mortgage payments jump $1,000 or more once they sign a new policy.
Greg McBride, chief financial analyst at Bankrate, spoke with Newsweek about the impending situation, sharing that it could be even worse.
“A borrower that took an adjustable rate mortgage and neglected to refinance when fixed mortgage rates were at record lows in 2020-2021 are paying for that now,” McBride said. “With the Federal Reserve having pushed interest rates up at the fastest pace in 40 years, a borrower facing an ARM adjustment now could see their rate jump to 8 [percent].”
On Wednesday, 30-year fixed-rate mortgages rose to 7.05%, and owing costs rose to 7.3%, according to the weekly survey from the Mortgage Bankers Association.
Now, ARM borrowers have found themselves in a potentially dangerous situation, and a poll from Bloomberg found that they are worried, with around 10% saying they could fail to make their mortgage payments under new rates.
“They could run into some trouble, especially on these large loan amounts, as their ARMs come out of the fixed period,” Chris Stearns, a mortgage loan adviser at Thrive Loans, told Bloomberg. “Your payment’s going to almost double, and it’s not gonna be pretty.”